The Ugly Truth About The Economy

There was a skew to the economic data through the holiday season that the popular press missed, but you heard about it all here. I'm talking about the Labor Data Lies and the consumer segment sleight of hand. Last Thursday, the truth was told again with regard to employment and consumers, and the truth, she is an ugly beast.

Weekly jobless claims counts slowed throughout the month of December, and the popular press declared that the job market had found life right on cue. It was one of the reasons stocks sought higher ground, but we reminded investors that the fellows at corporate headquarters across the United States still had hearts, and that layoffs could very well revert to the mean after the turn of the year. After all, we had seen it before only last year.

We were sort of vindicated, though it's a bit too soon to say so, when the latest jobless count was reported last week. For the week ending January 7, claims rose to 399K, just short of that psychological threshold where investors tend to bang their heads. It was enough to lift the four-week moving average by 7,750, though, at 381,750, it didn't quite wake the dead press to the truth.

Still, the anecdotal evidence seems to continue to pile on, as post holiday layoff announcements mount. In the short time since the big ball dropped in Times Square, we've seen U.S. worker layoff announcements by Sears (NASDAQ:SHLD), RBS, Delhaize (NYSE:DEG) and Novartis (NYSE:NVS). So as to not be accused of data mining, we note here Home Depot's (NYSE:HD) uplifting announcement that it would be hiring 70K seasonal workers for this spring. Still, that sounds like a temporary gig to me.

The week's wakeup call didn't stop with the employment data-point though. Thursday also offered a disappointing declaration about December's retail sales (pdf). The month that sure seemed like a blockbuster for holiday shopping, if you read the news, instead let down investors once the numbers were reported. Retail sales increased just 0.1% over November, against economists' expectations for a 0.4% rise. That said, November's results were revised higher to +0.4% from the initially reported increase of 0.2%; this had the effect of setting the bar higher for December.

However, when measuring retail sales excluding autos, sales fell 0.2% in December, and when taking gasoline sales out of the equation, they were flat against November. Both those measurements fell short of the economists' consensus, which was set at +0.4% for each, according to Bloomberg's survey of economists. The data was, without a doubt, less than reflective of the enthusiasm expressed throughout the month in the news and in stocks. Anecdotal evidence has not been supportive either, with December sales disappointments reported already by Sears , Tiffany ((NYSE:TIF), Best Buy (NYSE:BBY) and Urban Outfitters (NASDAQ:URBN).

I warned in a recent article that investors shouldn't buy into the seasonal data full of noise nor to the media that hypes it. I continue to suggest investors mitigate risk now by selling the retail sector. As the results come in, they will no doubt be hit or miss, depending on which retailer is reporting. There is an abundance of store capacity still, which exceeds demand for goods in the current environment, especially when considering the discounts available to shoppers online through the likes of Amazon.com (NASDAQ:AMZN) and EBAY. I suggested that the reported sales traffic through the holiday season might show up as disappointing earnings per share when we learn what it took to bring in shoppers. The depth of the discounting and the excessive store operating hours needed to capture every lonesome late-night shopper were costly indeed.

By some signs, the American economy is already coming under external pressure from Europe. We've shared our views somewhat already on international issues, but we'll have more to say in the near future as well. Beyond the far reaching risk tied to the deterioration of Europe and its well-cocked Greek trigger, the situation with Iran should not be considered an outlier and given no regard in scenario analysis. Thus, when I see and hear suggestions of American economic recovery from many of my peers these days, the truth still haunts me.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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